5/28/2010 @ 5:52PM

Elon Musk's Financial Car Wreck

The romantic notion of starting a car company in your garage is a folly from a bygone era. Even when the government is handing out billions of dollars to help electric-car startups get off the ground, the costs can be overwhelming.

Just ask Elon Musk, the founder of Tesla Motors. His company, which sells the $100,000 battery-powered Tesla Roadster, is probably the best-known of a crop of fledgling electric car companies including Fisker Automotive, Coda Automotive and Aptera Motors that are looking to reinvent the auto industry.

But Musk, who sold his previous company, PayPal, to
eBay
for $1.5 billion, now says he’s broke.

“About four months ago, I ran out of cash,” he wrote in a court filing dated Feb. 23, and first reported by VentureBeat, a Silicon Valley blog. Musk, whose other business interests include SpaceX and SolarCity, said he’s been living off personal loans from friends since last October.

Of course, Musk’s disclosure came in a filing as part of his divorce from novelist Justine Musk, so perhaps it is advantageous to be out of money at the moment.

His personal money troubles raise questions, though, about Tesla’s ability to continue financing its aggressive growth ahead of a planned IPO. The share offering has not yet been scheduled. A Tesla spokeswoman did not return a phone call for comment.

Until his recent liquidity problems, Musk had been pumping much of his personal wealth into Tesla, whose investors also include the founders of
Google
.

According to documents filed with the Securities and Exchange Commission, Tesla burned through $37 million in cash in the last three months of 2009. In the first quarter, it slowed that burn rate to $8.4 million.

Tesla has incurred about $261 million in net losses since its inception in 2007, including $55.7 million last year, according to the registration documents.

Designing and manufacturing automobiles sucks up capital like no other business. “Developing competitive cars for global markets costs several hundred million dollars, no matter how you cut it,” Fisker Automotive founder Henrik Fisker told Forbes. “Incorporating the latest technology, meeting crash and emissions regulations and providing a solid warranty program are just a few things to be factored in.”

Says David Cole, director of the Center for Automotive Research in Ann Arbor, Mich: “People have tended to underestimate the complexity of doing a car. This has been true for the ages.”

Indeed, there’s a long history of failed entrepreneurs in the automotive business, including Preston Tucker, John DeLorean and Malcolm Bricklin.

Ray Lane, managing partner at Kleiner Perkins Caufield & Byers, an early-stage investor in Fisker, told Reuters that given the capital required to mass-produce automobiles, he expects a shake-out among the small EV companies.

What’s different now, however, is that the U.S. government is offering a helping hand, with $25 billion available to help both large and small companies develop more fuel-efficient vehicles.

Last June, Tesla received a $465 million loan from the U.S. Department of Energy to fund development of its next car, called the Model S, and to manufacture battery packs for Tesla vehicles and others.

And last week, Tesla got a shot in the arm from
Toyota Motor
, which said it would invest $50 million in the company when it goes public. Tesla also agreed to buy a former General Motors-Toyota joint venture factory in California for $42 million.

“He’s trying to set the table (for an IPO) by saying we’ve got money. We’ve got this government loan. We’ve got a big investor in Toyota. He’s trying to get the white knight to stand beside him to give legitimacy to the concept he’s talking about,” says Cole.